French Investigation Aims at Salomon and Swiss Bank

By PETER TRUELL

Published: July 29, 1995

Salomon Brothers Inc. and the Swiss Bank Corporation confirmed yesterday that they were being investigated by the French stock market regulatory agency in connection with possible insider trading in shares of Eurotunnel, but they vehemently denied any wrongdoing.

The agency, Commission des Operations de Bourse, said this week that two financial institutions were suspected of insider trading in the shares of Eurotunnel before a $1.2 billion stock sale in May 1994. The two were among the underwriters of the issue. The commission did not identify the institutions, but the names of Salomon Brothers, a unit of Salomon Inc., and Swiss Bank later appeared in the French press.

Eurotunnel, the troubled British-French consortium that built the tunnel under the English Channel, has come under increasing criticism in France, where tens of thousands of small shareholders helped to finance the company. These and other early investors in Eurotunnel suffered big losses as the ambitious project was repeatedly delayed and its construction costs more than doubled, exceeding $16 billion. The tunnel finally opened just over a year ago.

Many French investors contend that important information about Eurotunnel was at times disclosed first in London, benefiting big financial institutions there.

On Tuesday, Commission des Operations de Bourse said it would turn over its report on the reported insider trading to the Paris prosecutor's office. The French press subsequently identified the two underwriters as Salomon Brothers International and Societe de Banque Suisse (France) S.A., a unit of Swiss Bank.

The two investment banks both issued strong denials.

"We're confident that any allegations of wrongdoing in this case will prove false," said Leigh Bruce, a spokesman for Salomon Brothers International. "We have no evidence that anyone did anything wrong."

And Swiss Bank said it "vigorously denies any improper conduct in connection with the Eurotunnel rights issue" and was satisfied that it had acted properly.

The investigation by French stock market regulators, begun last year, has focused on the heavy trading in Eurotunnel shares that took place in the five months before the May stock issue, when the company's stock price fell more than 40 percent.

During these months, there was substantial short-selling of Eurotunnel's stock by the trading departments of many big financial institutions. The short-sellers were essentially betting they could profit from the increasingly gloomy prospects for Eurotunnel, selling borrowed shares in the hope that they could buy the stock back at lower prices and pocket the difference.

But the corporate finance departments of some financial institutions were helping to prepare the May 1994 share issue, intended to shore up Eurotunnel's flagging finances. In that role, these departments would have received privileged information about Eurotunnel.

It is not yet clear what other action French stock market regulators may take if they confirm that insider trading took place. The regulatory agency has the power to levy fines of as much as 10 million francs ($2.1 million) or 10 times the profits made from use of nonpublic information. If the Paris prosecutor begins criminal proceedings, any convicted offender could face separate fines and up to two years in jail under French law.

Commission des Operations de Bourse also sent a letter this week to Patrick Ponsolle, the chairman of Eurotunnel, criticizing Eurotunnel for releasing information in London to the British newspaper The Guardian that it did not provide to the market until a few days later. The price of Eurotunnel's shares fell sharply on Oct. 13, 1994, the day the Guardian article about Eurotunnel was published.

Eurotunnel's shares, which were first issued in 1986 at 300 pence a share, and which traded at almost 1,000 pence in 1989, closed up slightly yesterday at 182 pence ($2.91) on the London Stock Exchange.

Meanwhile, Salomon Brothers ran into another problem with its European business yesterday: Lehman Brothers said it had hired away Salomon's senior investment bankers covering European financial institutions.

"When you bring the pieces all together, we hope to end up as far and away the strongest financial institutions team in Europe," said Steve Berger, head of Lehman's European investment banking division.

Salomon Brothers also lost Antonio Villalon, who specialty is Spanish and Portuguese banks; Nick Lyons, whose expertise is in financial services companies in Scandinavia and Britain, and Martin Dolan, who specializes in insurance companies.

Competitors said the team Lehman hired had accounted for more than half of Salomon Brothers' investment banking revenues in Europe.

"This is an important business to us," said Robert Baker, a Salomon Brothers spokesman. "But one should bear in mind that these business relationships tend to be institutional."